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Transparency and funding of state and local pension plans : hearing before the Subcommittee on Oversight of the Committee on Ways and Means, U.S. House of Representatives, One Hundred Twelfth Congress, first session, May 5, 2011.
Using newly collected data on over 100 state-administered pension plans, this Article shows that previously overlooked differences in institutional design are associated with the striking variation in funding discipline across U.S. public pension plans. As state and local governments grapple with unfunded pension obligations, this Article presents a timely examination of public plan governance across two key dimensions: the allocation of control over funding decisions and the transparency with respect to funding liabilities. It shows empirically that greater constraints on legislative control over funding decisions -- typically through the delegation of control to pension-system boards -- have been associated with better funding discipline. Conversely, liability-pooling arrangements that have shrouded individual employer responsibility for underfunding have been associated with worse funding discipline. These findings should inform current reform efforts to address the multi-trillion dollar shortfall in pension funding. To date, such state and local government efforts have focused primarily on scaling back benefits for public employees but have overlooked the role of institutions in explaining why some public employers have consistently contributed to the pension funds while others have failed to set adequate contribution rates or have withheld promised funds.
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Recent market declines have significantly diminished the asset value of state and local pension plans (PP). Reported unfunded liabil. for these plans are estimated in the hundreds of billions of dollars. As a result, in the long term, these governments may need to make significant fiscal adjustments such as modifying employee benefits, or increasing contributions to plans. They may also alter invest. strategies to attempt to maximize returns by assuming increased risk. This report examined: (1) who makes invest. decisions for PP and what guides their decision making; (2) how PP allocate their assets and manage their invest.; and (3) practices that PP are using to meet a range of challenges in governance, invest., or funding. Illus. A print on demand report.
In 2010, the pension plans of state and local governments came under increased scrutiny in response to their generally weak financial positions and mounting costs to taxpayers. By some measures, these funds are as much as $3 trillion short of the assets they would need to cover the promises they have made to government workers and retirees. However, several shortcomings in these funds' financial disclosures have made it difficult for even lawmakers and policy experts to accurately evaluate pensions' actual financial condition. There are several steps, over and above what the Government Accounting Standards Board already requires, that funds could take that would disclose their finances more fully. The recommendations lie in five areas: (1) Discounting; (2) Smoothing; (3) Accrual method; (4) Projections; and (5) Normal cost. These steps would make it easier to answer such questions as: How well funded is a given state's pension plan? How much does a public employee's pension in a given state cost? And what effects are pension costs likely to have on the next few years' budgets? The report also discusses which entities should be responsible for implementing these changes in disclosure policy. It argues that states should voluntarily adopt them, and that they should require municipalities to do so. The federal government should also take steps to encourage states to make the recommended disclosures. (Contains 3 tables and 18 endnotes.).